THE global economy is facing ”a slow-motion train wreck” with Greece only the first nation to be hit, Reserve Bank director Warwick McKibbin has told a Melbourne conference.

Referring to the most recent global economic crisis as a mere ”blip”, he said the coming crisis could undo the mining boom and bring on inflation of the kind not seen since the 1970s.

Professor McKibbin told the Melbourne Institute conference dozens of European countries now had gross government debts on track to exceed 60 per cent of GDP. ”Japan is forecast to be 200 per cent of GDP, the US is forecast to be over 100 per cent of GDP,” he said.

”At zero interest rates that can be sustained, but at 5 per cent interest rates countries have to put aside 5 per cent of their GDP every year just to service the debt. That is not sustainable.

”Already consumers aren’t spending and investors aren’t spending because of the tax increases that are in prospect.

”Greece, Portugal and Ireland don’t just need to have their debts written off, they need to have a 30 per cent to 40 per cent depreciation of their real exchange rate,” he told the conference.

”There are two ways to do that, either pull out of the euro and depreciate by 40 per cent, or have deflation of 40 per cent over the next 12 months.

”I do not believe any society can survive having a 40 per cent deflation that’s been imposed by the International Monetary Fund and the European Central Bank.”

As the US created more dollars to inflate away its debt repayment obligations, countries that are linked to the dollar, including China, India and parts of Latin America, would suffer 1970s-style inflation.

”In India inflation is 9 per cent, in China it is 6 per cent. That inflation is pushing up resource prices for now, but it will have to be brought under control with much higher interest rates,” he said.

Joking that he could not talk about Australian interest rates, which were in any event ”always appropriate”, the Reserve Bank board member warned that the inflation would spread worldwide.

Australia needed a sovereign wealth fund to store mining income while it lasted, ideally stored in a separate account for each taxpayer so the government could not raid it.

The $50 billion national broadband network epitomised the sort of waste Australia could not afford. ”I would say to any politician who thinks that spending is worthwhile, take your salary as shares in NBNCo. If you think it’s a good investment, you’ll be ahead,” he said.